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Can we expense unexpended condo reserve fund upon sale of office condo?
08-17-2018, 10:48 AM
Post: #1
Can we expense unexpended condo reserve fund upon sale of office condo?
I was a co-owner of an office condo which we sold in 2018. We had contributed $9,297 to the condo reserve fund, but had not been able to capitalize or expense any of it on the T776 forms of our personal tax returns as none of the fund had been expended. CRA says that it is, therefore, a prepaid expense (see below).

It seems to me that since we sold and are leaving the money behind, we ought to be able to finally claim the full amount as an expense for this year as, in effect, the money is now gone and we will never have another opportunity to claim it. We sustained a large capital loss upon the sale.

I spoke with a CRA agent who said this amount will increase the loss by adding it to the Adjusted Cost Base in Schedule 3, but that we cannot otherwise record this expenditure in our T776's. He also said that we could have asked for $9,297 extra from the buyer, but in fact the price we received reflected what the buyer deemed to be the value of our asset or at least what he was willing to pay. The thing is that we have been able to apply CCA to our initial purchase and to capital additions over the years and somehow it doesn't make sense to me that we are out this money without being able to claim this as an expense. How is it any different from a capitalized expense?

Does anyone know whether we can somehow expense this? Thank you in advance for any advice you can offer.

Excerpt from IT304-R2 ¶ 8. Usually, a part of the condominium fee paid by the unit owner goes into the condominium corporation’s reserve fund for maintenance, repairs, improvements or additions to the common elements. Furthermore, a unit owner may be charged an extraordinary levy by the condominium corporation for a portion of the costs relating to repairs or renovations required to be made to the common elements. In either case, no deduction or capitalization of the expense is permitted until the amount is laid out to earn income by the condominium corporation. This is because prepaid expenses, or expenses which are paid before they are actually incurred, are not deductible as explained in the current version of IT-417, Prepaid Expenses and Deferred Charges. Whether the unit owner deducts the amount as a current expense or capitalizes it depends on the nature of the work done.
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08-23-2018, 08:02 AM
Post: #2
RE: Can we expense unexpended condo reserve fund upon sale of office condo?
I can see both sides of the argument.

If you were able to claim the $9297 as expense, you would have been able to utilize it as an operating loss deductible against other income. If it was added to the adjusted cost base of the condo, you would have increase your capital loss, which does not help your tax situation.

Was the $9297 paid over a period of time. Was it not part of the strata fees? Don't the strata council normally take out a reserve portion out of the monthly strata fees, allowing the condo owner to just expense the entire strata fees?
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08-23-2018, 06:03 PM
Post: #3
RE: Can we expense unexpended condo reserve fund upon sale of office condo?
Thank you for your response Tina. It was paid over 9 years and it was taken out of the monthly fee, but per the excerpt I quoted in my original post from CRA, it can't be claimed until it is expended. I finally broke down and asked an accountant. Here is part of what he said:

...the CRA officer told you that the additions to the reserve fund are additions to the ACB (original cost) of the property, because those monies added to the balance sheet values of the condo and they were not refunded to you in conjunction with the condo sale action (ie. they were part of what was sold for the overall sale value)...

...The reason why you cannot claim this as an expense is because:
Expenses are only available if they are expended in the generation of revenues (per classic accounting, as well as taxation guidelines)
Disposal of capital assets are to be treated by calculation of capital gains or losses

...I can certainly appreciate the sour feelings you have about selling the condo at a loss, and seeing the reserve fund being lost as well (in the transaction) that nets you non-refundable taxable losses that have to be applied to future taxable capital gains to realize any net benefits…. And you currently can’t conceive of where you would see any future taxable capital gains coming your way.

...there is one benefit that can eventually come your way because you have a pre-existing balance of unapplied taxable capital losses…

If a taxpayer has a balance of unapplied taxable capital losses***** (from prior years), those taxable capital losses can be first used to offset any other taxable income on the person’s final tax return, to the point at which that tax return has NIL taxable income. If there remains a balance of taxable capital losses, after having been already applied to a person’s final return, the tax return of the year prior to the final tax return can be amended to further apply the remaining balance of unapplied taxable capital losses.
Note: accumulated taxable capital losses cannot be applied to a final tax return, and/or the amended tax return of the year prior to the final tax return, to bring that year’s taxable income to negative… these can only be applied to bring the tax return to NIL taxable income

*****(when they are applied to one’s tax returns, the balance forward of taxable capital losses will need to be adjusted for the historic differences in income tax return inclusion rates applying to capital gains and losses (eg. capital gains/losses are currently taxable, or “added to other income on the tax return”, at a 50% rate, but there was a 2/3 and a 75% inclusion rate in past years)
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